When Australia’s Safeguard Mechanism (SGM) comes up for review in 2026–27, it will do so under far more scrutiny than when it was reformed in 2023. By then, declining baselines will be biting harder, compliance demand will be rising, and questions around offset supply, enforcement certainty and long-term policy credibility will be unavoidable.
“This will be an important test of the government’s commitment to meeting its targets,” Tony Wood, Energy Program Director at the Grattan Institute told Energy Insights.
Wood has repeatedly pointed to the Safeguard’s structural importance in Australia’s climate architecture. Alongside the New Vehicle Efficiency Standard (NVES), he argues, it stands out against a thin policy landscape.
“The effectiveness of these policies should become clear in 2026,” Woods said.
The SGM remains one of the few policies that imposes a binding emissions constraint on Australia’s largest industrial facilities. Under current settings, facility baselines generally decline by 4.9% per year to 2030, with post-2030 decline rates explicitly deferred to the 2026–27 review.
The Clean Energy Regulator administers the scheme, with the review by the Department of Climate Change, Energy, the Environment and Water already hard-wired into the policy framework.
That timing matters. The review coincides with decisions on Australia’s post-2030 emissions trajectory and its ratcheted 2035 national climate target, placing pressure on policymakers to align industrial settings with longer-term ambition.
Independent market analysis suggests that, while the SGM is delivering declining emissions in aggregate, the pace of change is lagging the scheme’s own baseline trajectory.
Energy analyst David Leitch notes that around 215 facilities emitting more than 100,000 tonnes of CO₂-e per year are covered by the Safeguard, representing roughly 28% of national emissions. While covered emissions have fallen modestly since the 2023 reforms, exceedance volumes - the emissions requiring offsets or credits - have increased sharply.
“Covered emissions fell only around 4.3% over two years, while exceedance volumes increased by more than 50%,” Leitch told Energy Insights. “This indicates facilities are not decarbonising fast enough to keep pace with declining baselines.”
Source: David Leitch, ITK Services.
For many observers, the most visible test of credibility will be whether baseline decline rates remain aligned with national targets after 2030.
Government impact analysis makes clear that this was always intended to be revisited.
The Office of Impact Analysis predicts baseline decline rates for 2030–31 to 2034–35 will be set by 1 July 2027, subject to decision following the review.
From an investor and market perspective, those decisions will determine whether the Safeguard continues to drive genuine abatement, or whether its impact plateaus.
Leitch argues its credibility will hinge on whether baseline decline rates are aligned with Australia’s 2035 nationally determined contribution. Under current rules, an indicative post-2030 decline rate of 3.285% is specified. However, Leitch notes: this falls well short of what independent analysis suggests is required.
“The indicative 3.285% post-2030 rate is inconsistent with even the minimum 2035 target,” Leitch said, citing analysis showing annual declines of between 4.8% and 6.9% would be required to align with Australia’s 2035 ambition.
William Acworth, Executive Director and Economist at specialist investment and advisory firm Pollination, stated: “As baselines decline, compliance demand will ratchet quickly, with prices shaped by how well ACCU supply keeps pace. Key decisions around the upcoming SGM Review will define the market's trajectory.
Offset use is an explicit design feature of the Safeguard, allowing facilities that exceed their baseline to surrender Australian Carbon Credit Units (ACCUs) or SGM Credits (SMCs).
As the Carbon Market Institute explains: “Facilities that go over their baseline are required to buy and surrender one Australian Carbon Credit Unit (ACCU) or SGM Credit (SMC) for each excess tCO₂-e.”
But that flexibility also ties the Safeguard’s credibility directly to the integrity and availability of offsets - an issue that will be under its own spotlight in 2026, when the ACCU Scheme undergoes review.
In its submission to that process, think tank Climate Integrity warned of spillover risks: “Without reform, the ACCU Scheme and linked compliance frameworks - including the SGM - risk diverting capital away from long-term emissions reductions.”
For Kurt Winter, Director of Corporate Transition at the Carbon Market Institute, the credibility question is broader than any single design lever.
“Credibility in the SGM means ensuring that the mechanism provides a framework to facilitate decarbonisation pathways for all applicable sectors at the speed and scale necessary to support Australia’s ratcheted 2035 national climate target,” Winter told Energy Insights.
In practice, he argues this requires expanding the scheme’s reach and refining its incentives.
Winter also emphasised the need to manage unintended consequences and international competitiveness.
“It is critical that the mechanism appropriately supports the international competitiveness of Australian industry in a carbon-constrained global economy, carefully managing the risk of carbon leakage and considering sovereign manufacturing capabilities,” he said.
Leitch also highlights the interaction between Safeguard settings and new large-scale resource developments, particularly LNG. He notes that several major LNG projects entering the scheme later this decade will represent a material share of new entrant emissions, raising questions about how baseline allocation, trade-exposed assistance and the scheme’s emissions budget interact.
“The entry of major new LNG projects risks consuming a substantial portion of the scheme’s remaining emissions budget,” Leitch said, “potentially forcing deeper cuts on other facilities or greater reliance on offsets.”
Leitch emphasises that this is fundamentally a system-design challenge rather than a sector-specific judgement, with implications for how the Safeguard balances competitiveness, carbon leakage risk and aggregate emissions outcomes.
While baseline ambition and offset integrity attract most attention, enforcement certainty is a quieter - but no less critical - credibility pillar.
The Clean Energy Regulator has stressed that confidence in compliance underpins investment decisions: “A strong compliance and enforcement framework is fundamental to maintaining the integrity of Australia’s greenhouse gas reduction schemes, supporting market confidence to invest and hence accelerate carbon abatement.”
As baselines tighten, facilities and financiers alike will be watching closely to see whether enforcement remains predictable, consistent and transparent.
The SGM’s importance is amplified by what sits around it - or, in some cases, what does not.
Winter argues that it’s role should be seen within a broader policy ecosystem, rather than as a substitute for it.
“Market-based policy mechanisms like the SGM will continue to play a central role in Australia’s net zero transition,” he said, noting that sectoral emissions reduction plans already assume its continued operation.
Others would like to see the review used to significantly expand the scheme’s scope and ambition.
Tim Buckley, Director of Climate Energy Finance (CEF) told Energy Insights that CEF “strongly advocates that the SGM 2026 Review expands the scope of the SGM by progressively reducing the cap from 100ktpa towards 25ktpa”, alongside measures to increase credit demand to progressively raise the carbon price from its current A$30-40/t band towards the EU ETS price of Euro80-90/t.
“CEF also recommends expanding the SGM into the electricity sector,” he added.
By 2026, the SGM will no longer be judged on design intent alone. Its real-world impact on emissions, investment decisions and industrial transformation will be visible.
As Wood observes, that makes the upcoming review a credibility test not just for one policy, but for Australia’s broader approach to industrial decarbonisation.
Leitch’s suggests the 2026–27 review will be less about fine-tuning and more about resolving structural tensions within the scheme.
“The gap between the indicative 3.285% rate and rates required for the 2035 NDC… creates uncertainty for facility operators attempting to plan long-term decarbonisation investments,” Leitch said. The review “must set decline rates for 2030-35 by July 2027. This will be the critical mechanism for translating the NDC commitment into binding facility-level requirements.”
Whether through recalibrated baselines, strengthened offset integrity, clearer enforcement signals - or all three - the outcome will shape emissions outcomes well beyond the power sector, and well beyond 2030.